MORGAN STANLEY: Banks need to disrupt themselves before someone else "eats their lunch"

REUTERS/Beck Diefenbach

Fintech companies are disrupting the banking industry.

• Banks need to transform themselves or they'll be left in the dust by fintech upstarts, a Morgan Stanley report warns.
• Fin tech companies raised $58 billion globally in the first half of 2018.
• US Banks are better positioned in comparison with banks in other regions.

Banks need to transform themselves or they'll be left in the dust by new fin tech companies, according to a new report.

With fin tech companies raising $58 billion globally in the first half of 2018, banks are feeling more pressure than ever to spend on their own technology. This is compounded by the fact that fin tech companies don't suffer from legacy IT systems and can provide banking services 50% cheaper than big banks.

"Pressure is mounting for banks to innovate and disrupt themselves fast, before someone else 'eats their lunch'," Morgan Stanley analyst Betsy Graseck wrote in the report.

Big banks are already stepping up their tech investments in response. JPMorgan's tech budget, for example, has grown to $10.8 billion in 2018, an increase of 14% over last year.

European banks are most at risk for being disrupted, as they've been burdened by negative interest rates for years and regional regulators are more open to fin tech companies.

US banks are better positioned, as they've adopted IT innovations early, the report said.

Large banks have for years seen the value in partnering with and investing in fin tech companies. Only 7% of banks are developing their own technology solutions in-house.

Big banks are dedicating their IT budgets to data management and digital/mobile banking, while blockchain technology is seeing less investment.

The report concluded that banks with "best in class" technology can better defend themselves from fin techs. These banks include JPMorgan, Bank of America, BBVA and DBS Bank.